As reported over the weekend in Zero Hedge, Gain Capital sent a message to clients late last week that as of July 15 US clients can no longer trade over-the-counter precious metals, including Gold and Silver. All open positions for US clients need to be closed as of the July 15 date.
A copy of the Forex.com email sent to clients as reported in Zero Hedge appears below.
From: FOREX.com
Date: Fri, Jun 17, 2011
Subject: Important Account Notice Re: Metals Trading
Important Account Notice Re: Metals TradingWe wanted to make you aware of some upcoming changes to FOREX.com’s product offering. As a result of the Dodd-Frank Act enacted by US Congress, a new regulation prohibiting US residents from trading over the counter precious metals, including gold and silver, will go into effect on Friday, July 15, 2011.
In conjunction with this new regulation, FOREX.com must discontinue metals trading for US residents on Friday, July 15, 2011 at the close of trading at 5pm ET. As a result, all open metals positions must be closed by July 15, 2011 at 5pm ET.
We encourage you to wind down your trading activity in these products over the next month in anticipation of the new rule, as any open XAU or XAG positions that remain open prior to July 15, 2011 at approximately 5:00 pm ET will be automatically liquidated.
We sincerely regret any inconvenience complying with the new U.S. regulation may cause you. Should you have any questions, please feel free to contact our customer service team.
Sincerely,
The Team at FOREX.com
The Forex.com message apparently stems from Forex.com’s interpretation of some of the Dodd-Frank rules which prohibit “…a transaction in any commodity with a person that is not an eligible contract participant or an eligible commercial entity, on a leveraged or margined basis.”
It is unclear whether or not the other NFA-licensed US firms will follow suit in their understanding of the rule, and also shut down precious metals trading for US retail clients next month. If so, all that will be left to trade for US clients of these firms are “pure” Forex pairs, as US clients are already precluded from trading CFDs such as stock indices and individual stocks – the US Securities and Exchange Commission (SEC) has a longstanding rule which prohibits over-the-counter trading in instruments which directly mimic the price of an underlying security which is listed on a recognized exchange.
While “non-Forex” instruments have traditionally represented less than 10% of Forex firms’ trading volumes, the number has risen recently, mainly due to Gold’s long rally and the high level of volatility in Silver prices the past few months.
It is not inconceivable that in the future even “plain” over-the-counter Forex pairs trading might be disallowed in the US, if Forex pairs become listed on an exchange.
These changes, in our view, have not caught the US-based Forex firms off guard. Over the past several months some of the leading US Forex firms have clearly been preparing for a shrinking (or potentially the entire disappearance) of their home market, by making aggressive strides to expand internationally, for example FXCM’s March 2011 acquisition of CGI Capital Japan for $27 million. (For an expanded list of M&A and financing transactions in the Forex sector from 2005-present see our Online Forex Industry Report). As we reported last month, Asia now represents the largest retail market for both FXCM (42% of volume in Q1) and Gain Capital (48% – and that for a firm which until recently did more than half of its entire volume in the US!). Other firms, such as Oanda and MB Trading, have gone through the FSA registration process in the UK, to provide a basis for expansion in Europe.
The fear among many who follow the industry is that European legislators and regulators may at some point (over-?) react like their US counterparts, and introduce similar restrictions on instruments and leverage. However, we do not believe that this will happen, at least not any time soon, due to a variety of factors – mainly the longstanding difference in trading cultures between the US and Europe.